Google to buy 5% of AOL

Time Warner favors search engine giant's deal over Microsoft bid


Rebuffing aggressive overtures from Microsoft, Time Warner has agreed to sell a 5 percent stake in America Online to Google for $1 billion in cash as part of an expanded partnership between AOL, once the dominant company on the Internet, and Google, the current online king.

At stake in this battle is leadership in Internet advertising, a growing threat to other media companies. The loss is a blow to Microsoft Corp., which had sought AOL as a partner in its advertising venture to undercut Google Inc., its potent rival.

Though Google is just seven years old, its lucrative search advertising business and technical prowess could enable it to offer consumers free software and services that would directly attack Microsoft's core software business.

While the terms of the proposed five-year deal are largely set, it will not be final until it is ratified Tuesday by Time Warner Inc.'s board of directors, an executive who was briefed on the negotiations said.

Google has agreed to give AOL ads special placement on its site. Until now, Google prided itself on its auction system for ads, which treated small businesses on equal footing with its largest customers.

By agreeing to change its business practices for this deal, Google fends off what could have been a significant challenge from a combination of AOL and Microsoft and cements its position as far and away the largest seller of search advertising.

"This is Google's first test as a chess player in a major corporate battle," said John Battelle, author of The Search: How Google and Its Rivals rewrote the Rules of Business and Transformed Our Culture.

"They are saying, `We will take some of our pawns and block the move to our queen by Microsoft,'" he said. "Until now, Google has said, `We don't think about our competitors. We spend all our time building better products for our users.'"

Negotiations among the companies reached a fevered pitch Thursday night, executives briefed on the talks said, when teams from Google and Microsoft were in separate conference rooms in the Time Warner Center in New York and executives from the media company shuttled between them. At the same time, Time Warner was holding its corporate Christmas party at the Mandarin Oriental Hotel, also in the Time Warner Center.

At 9 that evening, Richard D. Parsons, chairman and chief executive of Time Warner, left the party to tell Eric E. Schmidt, Google's chairman and CEO who was leading its negotiation in another part of the complex, that he would accept Google's sweetened offer.

According to one executive, Parsons called Steven A. Ballmer, Microsoft's chief executive, at 10:30 a.m. yesterday to tell him that the deal that Microsoft had so eagerly sought - and had thought it had won - was going to Google, which it sees as its most serious long-term rival.

Microsoft had proposed that it and AOL form a joint venture to sell advertising on their own sites and eventually on other sites. Now Microsoft will compete in the search business as a distant No. 3 behind Yahoo.

Representatives of Time Warner, Google and Microsoft declined to comment.

Time Warner ultimately chose to go with Google because its proposal was simpler than the deal Microsoft proposed. Moreover, the lucrative offer promised to help drive more traffic to AOL's Web sites.

Google has been providing Web search and search ads for AOL since 2002. In the new arrangement, Google will offer promotion to AOL in ways it has never done for another company, two executives familiar with the negotiations said.

If a user searches on Google for a topic for which AOL has content, there will be a special section on the bottom right-hand corner of the search results page with links back to AOL will pay technically for those links, which will be identified as advertising, but Google is giving AOL credits to pay for them as part of the deal. They will also be accompanied by AOL's logo, the first time Google has agreed to place graphic ads on its search result pages.

Google will also provide technical assistance so AOL can create Web pages that will appear more prominently in the search results list. Google will also make a special effort to incorporate AOL video programming in its expanding video search section.

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